Dow Theory and the Transports

If not for the stubborn refusal of the Dow Transports to confirm recent new highs in the Dow Industrials, stock market technicians would have few reasons for complaint, notes Richard Moroney, editor of Dow Theory Forecasts.

Nearly all the major averages have broken out, with indexes and advance-decline lines for stocks of all sizes reaching new highs.

The number of stocks at 52-week highs continues to handily exceed the number at 52-week lows and such typically bull market sectors as technology, industrials, and consumer cyclicals have displayed much-improved price action since January 30.

The evidence suggests not. Broader, capitalization-weighted indexes of the transportation sector have performed in-line with the Dow Transports, reaching new highs in late 2014 before stalling this year. Also, all the major transportation-related industry groups have similarly stalled.

The Morgan Stanley Cyclical Index and other barometers of economically sensitive stocks have reached new highs, helped by strength in materials and consumer cyclicals. But the Dow Transports have been dogged by some questions crucial for the transportation sector, including:

Is industrial America still on a rebound path, even with a sharply higher dollar hurting exports and spending cuts hitting the energy sector? Shares of railroads (26% of the Dow Transports) and truckers (20%) are highly sensitive to expectations for the US industrial sector.

Will this time really be different for the airlines (17%), which have a history of cutthroat price competition? So far, US airlines are pocketing most of their fuel savings, but investors are worried the good times will end sooner rather than later.

How much will slowing global demand crimp US consumers and US companies? Few companies are more sensitive to end-market demand and global trade than airfreight providers (28%).

With a close above the Transports’ all time high of 9,217.44, the bullish primary trend would be reconfirmed under the Dow Theory.

Without new highs in the Transports, a pullback below the January 30 closing lows—of 17,164.95 in the Industrials and 8,649.32 in the Transports—would represent a bear market signal. For now, we’re holding about 85% of our buy lists in stocks.